Report for the Iron Ore Mining Investment in the Democratic Republic of Congo

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Report for the Iron Ore Mining Investment in the
Democratic Republic of Congo

To: The Board of Directors of Rio Tinto
From: Senior Analyst
Date: 05.05.2010

1. Executive Summary3
2. Introduction4
3. Discussion5
4.1. Economic Risk Assessment5
4.2. Sources of Financing8
4.3. Repatriation Issues11
4.4. Strategies for Expropriation situations15
4. Conclusion18
5. Appendices19
6. References20

1. Executive Summary
Iron ore mining is a growing industry within the African region and when compared to the global leaders, the Chinese, Australian, and Brazilian mining industries the size of the African industry is very small. However countries like the Dominican Republic of Congo are rich with iron deposits and have the potential to be significant players within the market. This report focuses on highlighting the key economic risk factors of the Democratic Republic of Congo considering the political variables, economic factors and the financial status of its economy, and to identify the impact it would have on a potential Iron ore mining investment by the International Mining Company Rio Tinto. The risks associated with shipping from the country are also identified due to its importance in the mining industry. Further the main sources of finance available for the investment are discussed in relation to the methods Rio Tinto normally uses to finance its foreign direct investments. Repatriation of funds being a key area of importance in investment decisions, the impact taxation, CSR and local environmental expenses may have on this is evaluated. Considering the political climate of the DRC, expropriation of assets and licences are a threat most investors may have to face. This report identifies strategies the company could adopt in such a situation.

2. Introduction

Rio Tinto is a British-Australian listed mining company that mine and produce mineral resources. The company is considered to be one of the largest mining companies in the world with numerous investments and subsidiaries around the globe. Its product portfolio includes aluminium, copper, diamonds, coal, iron ore, uranium, gold and industrial minerals. Iron ore mining is the company’s most profitable sector. The company is currently planning to make a foreign direct investment in the Democratic Republic of Congo to mine iron ore. The DRC is a country with an abundance of natural resources with the world’s largest deposit of copper and cobalt and also gold diamond and minerals. The country has a large population of approximately 68 million people. However the country’s political instability makes it one of the most difficult countries to invest in.

3.1. Economic Risk Assessment
The Democratic Republic of Congo has an open to trading system which is advantageous for potential investors. However the countries progress is curtailed due to its political, economic and social challenges. The country has a high level of corruption, inadequate security, an underdeveloped infrastructure, short supply of skilled labour, lack of property rights protection with unreliable contract enforcement practices. The courts are highly corrupt and public administration is flawed. The DRC was ranked 181 out of 181 in the 2009 and 2008 World Bank’s Doing Business reports as one of the most challenging countries to do business. Further the process of granting permits and licences suffer from corruption and lack of transparency. The inadequate physical infrastructure includes transportation, energy and social problems. However the loss making state owned energy sector is being open for private investment which would lead to a more reliable service in the future and the Chinese Chinese Ex-Im Bank is lending the DRC money that will be used to upgrade the road and railway network and upgrade water systems. The country has a free...
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